Why Copper?
Strongest Fundamentals of all Base Metals
Copper prices have strengthened over the last decade and remain resilient on the back of significant demand growth and constrained supply. Copper prices have increased from US$0.63/lb Cu when Equinox acquired Lumwana, through an agreement with Phelps Dodge in 2001, to reach recent highs of US$4.00/lb in 2008. The drivers for this incredible strength have largely been the urbanisation of China and the inability of the copper industry to deliver new sources of supply.
In 2008 and early 2009 the global economy experienced significant volatility and downturn as a result of the global financial crisis. As we emerge from the crisis, copper has again proven its resilience with prices rapidly recovering from early 2009 lows of US$1.45/lb to US$3.63/lb in April 2010. The rate of recovery has far exceeded market expectations and reflects the strength of Chinese demand.
The imbalance of demand and supply is also reflected in the consumption of copper inventories with LME and COMEX balances being reduced by more than one million tonnes in early 2004. Inventories remain at historically low levels, despite the global financial crisis in 2008 and 2009 with approximately 3 weeks of global consumption in inventory during the first quarter of 2010.
Copper is perhaps the most versatile of the base metals being used in power generation and transmission, whitegoods, electronic consumer goods such as TV’s, mobile phones and computers, plumbing, construction and automobiles among other uses. Copper is both malleable and an efficient conductor and as such is less prone to substitution during periods of high pricing. As growth rates in global economies recover and demand for all these goods increase so too will demand for copper.
One of the largest sources of new demand for these goods comes from China where the process of urbanisation and increase in affluence continues. Economic research highlights China’s importance to the copper market predicting that it will account for 50% of the world’s demand for copper by the year 2030. During 2010 China already accounts for greater than 30%.
The current rate of economic recovery in China, with growth predicted between 9% and 10% for 2010 following the Global Financial Crisis, shows how resilient this economy is and how demand for copper will continue to strengthen.
Compounding the strength in demand is a tightening of available supply. Existing copper supply is naturally declining as the average grade of copper contained declines and ore bodies are exhausted. The difficulties in discovering and developing new sources of supply make it difficult for supply to match this increasing demand driven by China. New supply is being impacted by a lack of investment and exploration during the 1990s, escalating development costs and increasing technical difficulties associated with the remaining ore bodies. Over the last 8 years less than 20% of planned new projects have actually been placed into production. During this time approximately 80% of planned projects remain undeveloped for financial and/or technical reasons. This makes the development of Lumwana an even more impressive feat.
Some copper market analysts believe that we are experiencing a "super cycle" driven by a structural shift in the copper market and the significance of China’s urbanisation. Chinese growth is expected to continue at or near current growth rates for the next 10 to 15 years suggesting that demand for copper will also continue at pace and require increased prices and significant investment to develop new sources of supply.
Lumwana is one of the few new copper projects of world scale to be developed over the last 10 years and is well positioned to benefit from expected periods of high pricing.
|
|
Prices are delayed by at least 20 minutes.